Monthly Archives: March 2012

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The rules for monitoring the financial products used by consumers are too subjective, Republican U.S. lawmakers said Thursday at a hearing with the recently appointed director of the federal government’s new watchdog.

The Consumer Financial Protection Bureau, created by a larger financial-overhaul law, is charged with protecting individuals from unfair, deceptive, or abusive acts and practices, among other directives. But this standard is too vague, charged Rep. Spencer Bachus, a Republican of Alabama and chairman of the U.S. House Committee on Financial Services. For example, he said, consumers have different levels of financial knowledge.

“In some cases, the ability of a consumer to understand” could determine whether a product is below the CFPB’s standard, Bachus told Richard Cordray, the CFPB’s director.

Rep. Jeb Hensarling, a Republican of Texas, voiced a similar concern about the standard. “Is it clear or is it subjective,” he asked. “Is it clearly subjective?”

Cordray said the CFPB’s guidelines speak about taking unreasonable advantage of consumers. “Good businesses and good banks are mindful of this,” and don’t approach certain customers with certain products. “It’s not one size fits all.”

However, he added that when it comes to gray areas, the CFPB “should tread cautiously.”

In response to questioning from another lawmaker about consumers’ personal responsibility, Cordray said individuals need to be reasonable and accountable, and that the CFPB can try to help them make better-informed decisions. “They’re the ones that have to live with those decisions.”

The CFPB began operating in July, and President Barack Obama appointed Cordray as director in January. His appointment was contentious — Obama appointed him during a recess after opposition from Republicans.

Cordray appeared Thursday before the House committee to detail the bureau’s early progress. During the CFPB’s first six months, it worked on resolving credit-card and mortgage complaints from consumers, starting a financial-institution supervision program, and developing straightforward financial-product disclosures, among other steps.

Survey after survey continues to conclude that consumers don’t have the best grasp of personal finance issues.
There are good intentions behind these surveys. Their purpose is to find out how to create financial literacy programs to help people understand the importance of saving and investing, the devastating results of taking on too much debt, and how to avoid becoming a victim of fraud.
In fact, April has been designated as National Financial Literacy Month. Last year, in a proclamation about setting some time aside during April to learn more about your finances, President Barack Obama noted: “As we recover from the worst economic crisis in generations, it is more important than ever to be knowledgeable about the consequences of our financial decisions. … The financial crisis was fueled by a lack of responsibility from Wall Street to Washington. It devastated ordinary Americans, many of whom were caught by hidden fees and penalties or saddled with loans they could not afford. Preventing a recurrence will require both better behavior and oversight on Wall Street and more informed decision-making on Main Street and in homes across our country.”
In other words, they — the bankers — did some awful things, but individuals still have to ultimately take personal responsibility for their own financial decisions.
So do you have any plans to observe National Financial Literacy Month?
If you don’t, let me suggest one thing you can do. Go to the website for the Consumer Financial Protection Bureau (www.ConsumerFinance.gov) and take the agency up on its “ask us anything” new feature. It’s an interactive online tool that allows you to submit questions on everything financial including credit cards, debt collection, reverse mortgages and more.
CFPB Director Richard Cordray says that “Ask CFPB” was designed to provide consumers “answers in plain language so they can make sound financial decisions.”
Far too often the people who are most readily available to answer your financial questions have an agenda because they want to sell you on a service or product. It’s important to seek out a source that can provide answers that are unbiased.
The Ask CFPB feature already contains hundreds of answers to the most commonly asked financial questions. The majority of the entries are focused on credit card and mortgage questions. However, in the coming months, the bureau will expand the database to answer questions about a range of financial products and services, including student loans, auto loans and checking and savings accounts.
There’s another government site that can help you: www.MyMoney.gov, which is dedicated to providing basic financial information culled from more than 20 different federal websites. If you prefer, you can call toll-free 888-MyMoney (696-6639) and can hear recorded financial tips, which are available in English and Spanish. You can also order a MyMoney toolkit, a package of printed financial materials from government agencies.
Here’s a really good idea: If you are a high school teacher, get your students to take the National Financial Capability Challenge at www.challenge.treas.gov. Educators can register for the free challenge, then download a toolkit that includes lesson plans to prepare their students for the online exam. The challenge, which is sponsored by the Department of the Treasury in partnership with the Department of Education, is open until April 13. The agencies will use the latter part of the month to tabulate scores and communicate back with test-takers about their scores.
Here’s an example of the type of question asked (there are 40 multiple-choice questions that typically take about 30 minutes to complete): Sara works full time at the Big Save store and earns $2,500 per month. Who pays the contributions to Social Security on the $2,500 per month in wages she earns?
A. Only Sara.
B. Only Big Save, her employer.
C. Both Sara and Big Save, her employer.
The correct answer is C. Last year, more than 84,000 took the test, with the average score being 69 percent. That’s not bad given the age group, but let’s get that average up, people. The top two scorers at each school and all students scoring in the top 20 percent nationwide will receive certificates.
Various government agencies and nonprofits are providing tips, programs and links to other events to help you in your journey to learn more. For example, the Office of the Comptroller of the Currency lists a number of financial literacy events including a “Shopping For Loans Webinar” on April 26 that teaches people to evaluate loan terms in order to get the best deal. For details go to www.occ.treas.gov and search for “Financial Literacy Update.”
Spend some time in April boosting your financial knowledge. It will be well worth it.

Year after year, debt collection complaints rank among the most-common consumer grievances the Federal Trade Commission receives. In fact, reports of deceptive debt-collection tactics were the second-most common complaint (after identity theft) that the FTC received in 2011.

“Debt collection is complicated, and some collectors may push the boundaries of the regulations and law to get money out of you,” says Bill Hardekopf, CEO of LowCards.com . In fact, JP Morgan Chase is being investigated by the government for improper credit-card collections, he says. If you’re having trouble paying off your credit-card debt, you need to understand the collection process and know what your rights are.

You have at least 21 days after your credit-card statement date to make a minimum payment. If your payment is late, your card company will report it to the credit bureaus — but you may get up to 60 days if it’s your first late payment and you’re a good customer, Hardekopf says. That information will remain on your report seven years after the date you first missed the payment.

If your account is 60 days past due , the late payment is noted on your credit report and your credit-card company will turn over your account to its collections department.

If your account is 90 days past due , your card issuer will repeatedly call or send letters and will likely shut down your account.

Beyond the 90-day point , your card issuer will turn over your account to a collections agency or third-party debt collector, which will contact you through phone calls, e-mails and letters, Hardekopf says. The collector can sue you and send you a summons to appear in court. If you don’t show up, the collector will automatically win the case and can seize your assets or garnish your wages to pay off the debt.

If collectors are calling you, Hardekopf says you should …

-Verify the amount and the creditor before making any payments. If you don’t recognize the debt, write a letter to the collection agency and creditor to dispute it.

-Attempt to negotiate a settlement directly with the credit-card issuer first. If that doesn’t work, work with the collection agency to develop a realistic payment plan.

-Check your state’s statute of limitations for filing lawsuits to collect credit-card debt. You can have a case dismissed if the suit wasn’t filed within this time limit.

Despite all of the new powers at their disposal, regulators continue to emphasize simplified and standardized disclosure as a critical tool to ensure consumers get a fair deal.

The Consumer Financial Protection Bureau has applied behavioral research and design thinking to the creation of model mortgage forms, sharing a series of prototypes on its website and seeking feedback. Last month, the bureau shared a sample penalty fee box for disclosing overdraft fees on bank statements.

“We strongly believe that financial institutions can and should speak to their customers in terms that are simple and clear,” CFPB director Richard Cordray said during the Consumer Bankers Association conference last week. “This kind of straightforward transparency promotes more informed and more responsible decision-making by consumers across a number of financial markets.”

In an era of increasingly complex financial products, it makes sense to focus more attention on how to explain to consumers what’s in their wallets, especially given the sorry state of most disclosure forms.

To make a real difference, though, financial providers need to see disclosures as more than a legal requirement or a box to be checked. Disclosures are opportunities to positively influence consumers’ behaviors and choices.

Earlier this month, our organization, published recommendations for a standardized fee box for general purpose reloadable prepaid cards. Three prepaid card providers — Green Dot, Plastyc, and Ready Credit — have publicly committed to adopt or test the Center for Financial Services Innovation’s proposed disclosure box, and several others have expressed interest in the concept. (CFSI is a strategic partner of Core Innovation Capital, which is an investor in Plastyc, and Green Dot participates in CFSI’s Innovators Roundtable.)

CFSI’s recommendations detail a series of considerations in designing the prepaid disclosure box that we believe apply to financial disclosure broadly.

Disclosures should have a clear and consistent placement. The most well-designed disclosure document is useless if consumers cannot find it before making a purchase decision.

Thoughtful design and formatting can make it easier for consumers to understand disclosures and make it more likely they will be read. Organizing information into clearly defined lists or tables with categories and plenty of white space can improve comprehension.

Simple, clear and straightforward language is paramount. Disclosures for financial products are typically written at a reading level well above what most Americans can comprehend. When disclosures use terms that consumers do not understand, they tend to ignore them.

Crafting the ideal disclosure document requires making tradeoffs between simplicity and comprehensiveness. All fees should be disclosed somewhere, but trying to accomplish everything within a single box or table can reduce effectiveness, distracting consumers from what is most important or resulting in information overload.

Getting basic disclosures right is important for ensuring consumers see, read and understand product details before they buy, but disclosures can be so much more than a neutral sharing of information. The field of behavioral economics shows how they can be a tool for promoting positive actions.

One subtle but important way that CFSI’s model fee box encourages more efficient use of prepaid cards is by highlighting free services alongside those with costs. In the “Add Money” category, for instance, consumers will see that loading funds via direct deposit is free, while loading cash at a retailer has a cost. Seeing various ways to use the card for a particular activity and the cost differential can encourage behavior change.

In another example, online prepaid company Plastyc is rolling out a new disclosure box as part of a smartphone app that includes the typical use or median number of times a consumer incurs each of the listed fees in a month or a year. Putting fees in context provides consumers a better understanding of the total cost of using the product, helping them make a more informed decision about which product might be best for them.

New technology is transforming the way consumers conduct their financial lives. The mobile phone in particular presents a tremendous opportunity for providing consumers with relevant, real-time information that can enable improved decision-making.

Plastyc’s fee box will be accessible via smartphone at the touch of a button. How many consumers actually keep the lengthy terms and conditions document they receive when opening a checking account or receiving a new credit card, let alone carry it around with them to consult before making a transaction?

Information is power. By finding more creative and effective ways to share information, financial providers can empower their customers to make smarter decisions about their money, and in the process reduce costs and build customer loyalty. Everybody wins.

Consumer credit is on a tear. In January (the latest data available), consumers borrowed $17.8 billion, bringing outstanding consumer debt to $2.51 trillion. That’s the biggest three-month gain in more than a decade. Greater borrowing could be a good sign, showing that consumers are more confident—the magical emotion that can spur spending and help the economy rebound. But Dan Alpert, managing partner at Westwood Capital, a boutique investment bank, says not to start welcoming the “confidence fairy” yet. As he reads the numbers, something more troubling is going on.

While retail sales are slightly up, Alpert says that if the borrowing binge were driven by confidence, people would be spending at much faster rates. “You see this enormous growth in credit but you don’t see enormous pick-up in consumption,” he says. New data today from the Conference Board show that consumer confidence slipped slightly in February and is around the same level as a year ago, despite the big increase in borrowing. Alpert says people don’t have many reasons to be optimistic. Unemployment is still above 8 percent. And when people do get new jobs, they often don’t earn as much as they did before they were out of work—or even much more than they received from unemployment benefits.

“The dramatic rise is that people who had cash saved up for their kids’ education are finding themselves in a more difficult situation,” he says, because families now need to dip into education savings to make ends meet. Where they met shortfalls in the past by taking out home equity lines of credit, families now are turning to student loans. Nearly every student qualifies for the loans—Alpert calls them practically a “birthright” in the U.S. “They are effectively financing where financing is easiest to get,” he says.

The Federal Reserve doesn’t break out student debt in its monthly releases, but does say that “non-revolving” lines of credit—largely student and auto loans—now make up 68 percent of outstanding consumer debt. The Consumer Financial Protection Bureau estimates that student debt now tops $1 trillion, which is more than all the credit-card debt in the country. The CFPB points out that the growth in student loans reflects not just new origination, but also that some graduates can’t keep up payments. We recently reported that as many as 27 percent of borrowers are already late on their student loans.

Heavy student debt can cause a host of problems. On a personal level, debt burdens may affect future marriage and fertility rates. In the broader economy, heavier debt loads can drive down spending “as the present cohort of students enter their prime consumer years,” Alpert wrote in a blog post on EconoMonitor. There, he presents a graph that shows how the current divergence between borrowing and spending resembles how people acted before the crisis in 2008, when consumers took out loans (often through home equity lines of credit) just to pay down their other debts. Alpert says he’ll be watching retail sales trends in the next few months to see if the pattern continues. Last time, it proved dangerous and unsustainable.

March 27 (Reuters) – The new Consumer Financial Protection Bureau said it planned to play an active role in court cases involving disputes over consumer lending laws.

The agency, which opened its doors in July, is charged with policing markets for financial products such as credit cards and mortgages.

On Tuesday, the agency said it had filed a friend-of-the court brief in a truth in lending law case before the Denver-based U.S. 10th Circuit Court of Appeals.

“We are committed to making sure that borrowers can exercise their rights to the full extent allowed under this law,” CFPB Director Richard Cordray said in a release.

The agency said it planned to file these types of amicus briefs whenever it feels its views can help a court.

“Amicus briefs are an important way for the CFPB to ensure that the statutes it oversees are correctly and consistently interpreted by the courts, even in cases in which the CFPB is not itself a named party,” the bureau said in a release.

The bureau was created by the 2010 Dodd-Frank financial oversight law and has been a source of tension between the banking industry and the administration of President Barack Obama and other supporters of the new watchdog.

The purpose of the bureau is to make sure lending terms are clear and borrowers are not being fleeced.

The lending industry has said, however, that a too-heavy regulatory hand will limit what products can be offered and lead to higher borrowing costs.

In the brief filed this week, the bureau takes aim at past rulings involving the truth in lending law, saying some courts have misinterpreted the statute to the detriment of borrowers.

The case in question — Rosenfield v. HSBC Bank, USA — revolves around when a lender can cancel certain types of home loans, such as home equity lines of credit and second mortgages.

The law in question allows a borrower to cancel, or rescind, these loans within three days of signing to provide time to make sure they fully understand the terms of the agreement. That period is extended to three years if the borrower does not get proper paperwork.

The law does not apply to first mortgages.

The court is considering whether a borrower must also file a lawsuit against the lender within the three-year time period in order to cancel the loan, a move the bureau says is not required despite earlier rulings.

“These courts have erroneously dismissed rescission lawsuits as untimely, leaving consumers unable to litigate their claims on their merits,” the bureau said in its brief.

CFPB said it was not taking any position on the specific allegations made by the borrower in the case and is weighing in only on the question of what is allowed under the law.

In the last several months, many consumers, including those who have tried to reduce debt due to past financial problems, may have found themselves receiving a larger number of credit card offers. The nation’s top credit card issuers are now aggressively broadening their lending standards in an effort to expand their customer base, according to a report from TIME Moneyland. And one of the primary ways they’re doing so is not by targeting those with troubled credit histories, but rather sending extremely valuable introductory offers to consumers with the best credit scores. And in the last few months, as lender competition for these superprime borrowers has heated up considerably, the value of those initial offers has grown significantly.
Just last summer, top-notch borrowers could expect to get hundreds of dollars worth of bonus points, miles or cash back, just for signing up, and spending a certain amount in the first few months the account is open, the report said. But now, the most aggressive of these offers are worth more than $1,000 to borrowers who meet certain spending thresholds.
For example, the ThankYou Premier card from Citi will grant new cardholders a maximum of 80,000 points for signing up and then spending $3,000 on the card within the first three months the account is open, the report said. Those points are worth $1,060, meaning consumers are essentially earning more than 33 percent cash back on the initial offer.
However, that deal is beaten out by the offer for new customers who get an American Express Platinum card, the report said. The maximum value of that introductory offer is 100,000 points, which can be worth as much as $1,200. This card, too, has the $3,000 spending threshold in the first three months the account is open, but the total value of the cash back offer is 40 percent of that spending.
However, consumers should keep in mind that these offers also come with sizable annual fees that can take a lot of spending on a card to cover with rewards points. They also typically carry higher interest rates than no frills cards, meaning that credit card debt can pile up far more quickly on such an account if the balance isn’t being paid off in full at the end of every month.

Maybe consumers are feeling better about the economy. Or could it be that we are once again starting to rely on our credit cards a little too much? Some recently released figures make an argument for both sides of this debate.

The Federal Reserve Bank of New York released its latest Quarterly Report on Household Debt and Credit recently. It showed the number of open credit card accounts rose by 3 million, to 386 million, during the fourth quarter of last year.

Credit account inquiries within six months, an indicator of consumer credit demand, increased 2.7% for the third quarter in a row.

The report also found that credit card limits rose by $98 billion, or 3.6%, in the fourth quarter of last year, resuming the trend of increases observed in the first half of the year. This may indicate that banks are willing to take more of a financial risk with their cardholders.

The last two monthly G19 reports from the Federal Reserve show that consumers used their credit cards quite extensively to fund their holiday shopping. Revolving credit, which is made up primarily of credit card debt, increased at an annual rate of 4.1% in December. It rose nearly $3 billion, to $801 billion. This follows a jump of $5.5 billion in November, an annual rate increase of 8.4%. December was the fourth straight month of increases in revolving credit.

Consumer spending is one sign of a healthy economy. Consumers can’t afford to fall into the trap of spending more than they can afford, though, especially on their credit cards. If cardholders carry a balance on their credit cards, the high APRs issuers are now charging will destroy them financially. If consumers can’t pay off their entire balance on time every month, they will start to fall into the trap that helped lead to so many troubles during the recent economic recession.

(Reuters) – The economic recovery will remain sluggish for years because many consumers have made little headway in paying down debt, according to new research from a former Federal Reserve economist.

Karen Dynan, now a fellow at Brookings Institution, argues that the process of reducing debt, which economists call deleveraging, has been far too slow to lay the groundwork for a more rapid economic rebound.

“The most indebted households appear to have made fairly limited progress repairing their balance sheets, suggesting that their consumption could be weak for some time to come,” Dynan said in the paper.

In particular, Dynan says some 14 percent of Americans would need to reduce their debt load by the equivalent of more than a year’s worth of pre-tax income – meaning they would have to curtail spending sharply.

“If this deleveraging were accomplished by saving alone, it could mean a fairly drastic cut in consumption for many years for a small but not negligible share of households,” she writes.

The findings contradict some of the recent optimism on Wall Street, where stocks have rallied on hopes that a raft of better economic data might signal a more rapid growth spurt. U.S. gross domestic product expanded 3 percent in the fourth quarter but is expected to have slowed at the start of 2012.

But Dynan’s findings cast doubt on the chances of a swift near-term rebound for the consumer-reliant U.S. economy, particularly given ongoing headwinds from Europe’s own financial debacle.

The U.S. personal savings rate climbed as high as 5.8 percent as the recovery entered its second year in the summer of 2010, but has since waned to 4.6 percent. Data out earlier this month showed U.S. families took on more debt in late 2011 for the first time in 3-1/2 years.

Last year, the New York Federal Reserve estimated that student loan debt would exceed $1 trillion for the first time in 2012. At the moment, the New York Fed claims that $870 billion in student loan debt is outstanding.

However, the Consumer Financial Protection Bureau — the agency created by the Dodd-Frank financial reform law, which is tasked with policing consumer lending — believes that the New York Fed is underestimating the amount of student debt that Americans hold. In fact, a CFPB analysis shows that student debt has already cleared $1trillion:

Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

The new figure—released Wednesday at a banking conference in Austin, Texas—is a preliminary finding from a study of student debt that the bureau plans to release this summer. Bureau officials said the estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports.

That the debt number is this high is a sad result of the fact that, since 1985, the cost of college tuition and fees has nearly sextupled, while financial aid has failed to keep up. This month, 80 percent of bankruptcy lawyers said in a survey that they’ve seen a substantial increase in clients buried in student debt.

A study released yesterday shows that “almost two-thirds of U.S. student- loan borrowers misunderstood or were surprised by aspects of their loans or the student-loan process.” The CFPB began accepting complaints regarding the student loan industry this month.